When a judgment creditor seeks to collect from a debtor who has limited liquid assets but holds membership interests in a New York LLC or corporation, Article 52 of the New York Civil Practice Law and Rules (CPLR) provides powerful tools for enforcement. Specifically, it allows a creditor to enforce a judgment by selling the debtor’s interest in an LLC or corporation at a sheriff’s sale.
Article 52 Overview: Seizing and Selling Interests
Under Article 52, the creditor may apply for a court order to seize assets, including a judgment debtor's interest in an LLC or corporation. If granted, the creditor can pursue a "charging order" against the debtor’s membership interest, enabling them to collect on distributions the debtor would otherwise receive from the LLC. However, in some cases, especially when significant equity exists in these business entities, the creditor can petition the court to allow the sale of the membership interest outright.
In New York, this process is typically creditor-friendly, making it a useful path for recovering debts. For example, in a recent Second Circuit decision, the court affirmed the creditor's rights to seize LLC membership interests, reinforcing New York’s stance on upholding creditor claims in such cases.
Steps for Enforcing Judgments on LLC or Corporate Interests:
- Obtain a Judgment: First, the creditor must have a valid court judgment against the debtor.
- File for a Charging Order: The creditor can request a charging order from the court, which effectively garnishes the debtor’s right to any LLC distributions, diverting them to the creditor instead.
- Sheriff's Sale: If the charging order does not yield sufficient funds, the creditor can request a sheriff's sale. At this sale, the judgment debtor’s membership interest in the LLC or corporate shares can be auctioned, potentially transferring those interests to a third party or the creditor.
- Due Diligence and Valuation: It’s essential for creditors to assess the value of the LLC or corporate interest to determine whether this enforcement method is financially worthwhile.
Recent Judgments
In 245 Park Member LLC v. HNA Group, the Second Circuit upheld a ruling from the Southern District of New York requiring HNA International to turn over its Delaware LLC membership interests to satisfy a $185 million arbitration judgment. HNA argued that Delaware law restricts creditors to charging orders as the sole remedy for LLC interests. However, the Second Circuit affirmed that New York’s judgment collection rules apply, as the enforcement court is in New York.
Under New York’s CPLR § 5225, creditors can obtain turnover orders for any assignable property, including out-of-state LLC interests, even though New York's LLC act also allows charging orders. The decision clarifies that charging orders are not the exclusive remedy under New York law, meaning judgment debtors can be compelled to turn over their LLC interests or face contempt.
This ruling reinforces New York’s broad authority to compel debtors within its jurisdiction to transfer property, including assets located out of state, to satisfy judgments. It serves as a clear endorsement of creditor rights, limiting debtors’ ability to use LLCs in other jurisdictions as a shield against asset turnover. Practitioners may consider New York jurisdiction advantageous for enforcing judgments against LLC membership interests.
Considerations and Benefits
Executing a judgment by seizing LLC or corporate interests may be highly effective, especially when a debtor lacks liquid assets but has substantial value in business entities. However, creditors should consider the LLC operating agreement, as certain agreements may restrict the transferability of membership interests, potentially complicating enforcement.
By leveraging Article 52, judgment creditors in New York have a legal pathway to collect debts effectively, especially in cases where traditional means fall short. If you're navigating commercial judgment collections, working with experienced attorneys can ensure compliance with New York’s complex enforcement procedures and maximize the likelihood of successful recovery.
For additional information or legal assistance in commercial judgment collections, Hacker Murphy offers seasoned expertise in enforcing judgments and utilizing the full scope of Article 52 CPLR.
Contact Hacker Murphy today to discuss enforcing your commercial judgment and maximizing your recovery through proven legal strategies.